CBE rate hike aims to sustain disinflation, ensure 2027 inflation target is met

The Central Bank of Egypt (CBE) said its decision to raise interest rates by one percentage point was a pre-emptive measure aimed at sustaining the downward trajectory of inflation and ensuring that it reaches the target of 7% (±2 percentage points), on average, in the fourth quarter of 2027.

The CBE’s Monetary Policy Committee (MPC) decided last Thursday to raise its key policy interest rates by 100 basis points, bringing the overnight deposit rate to 20%, the overnight lending rate to 21%, and both the main operation rate and the discount rate to 20.5%.

The decision followed five consecutive meetings at which the committee kept rates unchanged: 24 September, 20 August, 9 July, 21 May and 2 April.

The CBE’s key policy rates serve as a major indicator of the direction of short-term interest rates on the Egyptian pound.

In its statement accompanying the decision, the MPC said the increase came amid an unfavourable external environment and heightened uncertainty, and was intended to anchor inflation expectations and preserve the downward trajectory of inflation.

Global economic outlook faces mounting risks

The committee explained that global economic activity had demonstrated a degree of resilience, supported by continued growth in trade and investment, particularly in technology-related sectors.

However, geopolitical tensions and divergent growth rates across economies continued to weigh on the global economic outlook.

At the same time, commodity markets had experienced broad-based price increases, particularly in energy and agricultural commodities, driven by escalating regional tensions and the resulting disruptions to supply chains.

The MPC noted that inflationary pressures remained generally elevated, despite differences across economies, prompting central banks to tighten monetary policy.

According to the committee, the global economic outlook remains exposed to increasing uncertainty amid the possibility of prolonged geopolitical tensions, tighter financial conditions, and disruptions to global trade and supply chains.

Domestic economic activity remains resilient

On the domestic front, preliminary CBE estimates indicate that real gross domestic product (GDP) growth remained broadly stable in the third quarter of 2026, at close to the 4.7% recorded in the second quarter.

This reflects continued growth in economic activity across major sectors, particularly manufacturing, services and trade, despite ongoing geopolitical tensions in the region.

Nevertheless, output remains below its full potential, although it is expected to approach that level by the second half of 2027.

The committee indicated that demand-driven inflationary pressures are likely to remain limited in the short term, supported by prevailing restrictive monetary conditions.

Mohamed Abdel Aal

Monthly inflation accelerates as annual rates decline

Regarding inflation developments, the MPC said monthly headline and core inflation accelerated in September to 1.3% and 0.8%, respectively, compared with August.

The increase in monthly core inflation reflected higher prices for basic food items and seasonal factors affecting those prices.

Although non-food inflation declined on a monthly basis, its overall level remained elevated.

Meanwhile, annual headline and core inflation continued their downward trajectories, declining to 13.9% and 14.1%, respectively, in September, supported by stable monthly inflation rates between June and August.

CBE adopts more restrictive stance amid inflation risks

Turning to the outlook, the MPC noted that risks and uncertainty had intensified compared with its previous meeting, adversely affecting global economic and financial conditions.

Consequently, it said a more restrictive monetary policy stance was necessary to anchor inflation expectations more firmly and sustain the downward trajectory of inflation, with the aim of achieving the target of 7% (±2 percentage points), on average, in the fourth quarter of 2027.

However, the committee cautioned that the outlook remained subject to several risks.

Chief among these is heightened global uncertainty arising from the possibility that the regional conflict could continue for longer than initially anticipated, with implications for global energy and other commodity prices that could fuel imported inflation.

Other risks include tighter global financial conditions and the possibility that the inflationary impact of domestic fiscal consolidation measures could exceed expectations.

Against this backdrop, and taking the surrounding risks into account, the MPC concluded that raising the CBE’s key policy rates by 100 basis points was necessary to strengthen monetary policy restrictiveness, further anchor inflation expectations and contain potential inflationary pressures.

The committee reaffirmed that it would continue assessing monetary policy conditions based on economic developments, the expected inflation trajectory and associated risks.

It also reiterated its commitment to taking whatever measures are necessary to maintain price stability and ensure that inflation returns to its target in the near term.

Rate hike signals shift away from monetary easing

For his part, senior banking expert Mohamed Abdel Aal described the CBE’s decision to raise interest rates by one percentage point as a surprise that ran counter to the expectations of most financial market participants.

He noted that it was the first interest rate increase since March 2024, when the central bank implemented an exceptional six-percentage-point hike alongside the unification of the exchange rate, ending a prolonged period of unchanged-rate decisions.

Abdel Aal said the latest decision signalled that the CBE was no longer moving towards a cycle of monetary easing or interest rate cuts.

Instead, it had adopted a pre-emptive and precautionary stance, shifting its focus towards addressing emerging inflationary risks.

According to Abdel Aal, inflationary pressures and energy costs were among the main factors that may have prompted the central bank to take this decision.

He explained that the CBE had opted to act ahead of any potential rebound in inflation resulting from global energy price shocks and higher import costs, while also seeking to regulate the pace of domestic demand.

He added that the decision was also intended to stabilise the foreign exchange market by sending a clear message that monetary policy was prepared to use its available instruments to curb undesirable exchange rate pressures.

Another objective, he said, was to protect foreign portfolio investments, commonly referred to as hot money, by narrowing the yield gap between Egyptian assets and global markets, particularly US Treasury bills.

This would help prevent potential capital outflows and encourage continued foreign investment in Egyptian debt instruments.

Higher borrowing costs challenge productive investment

Regarding the main implications for the economy and households, Abdel Aal said higher interest rates could support exchange rate stability in the near term by absorbing domestic liquidity and increasing the cost of currency speculation.

They could also enhance the attractiveness of government debt instruments to foreign investors.

He added that the increase was positive news for small depositors, as higher rates were expected to be reflected soon in the returns offered on savings certificates and bank deposits.

This would provide some protection for the purchasing power of savings against inflation, although it would also increase the cost of consumer borrowing.

Conversely, Abdel Aal argued that investment in productive economic activities would face the greatest challenge from the decision.

Higher lending rates would increase the cost of capital financing for businesses and factories, potentially causing a temporary slowdown in productive investment until the economic outlook becomes clearer and key indicators stabilise.

“In short, the Central Bank has opted for preventive medicine, reaffirming that monetary stability and the fight against inflation remain the first line of defence, regardless of the temporary cost to economic growth,” Abdel Aal concluded.